原文作者:Asher Zhang
Original source: Bitpush
Recently, Binance's algorithmic stablecoin Ethena has once again sparked heated discussions in the market. In every previous bull market, there will always be a wave of algorithmic stablecoins, such as Basis, Luna, etc. So, what are the innovations of Ethena this time, will Ethena have any hope of becoming the largest algorithmic stablecoin, and what are the potential risks and risks that Ethena will face?
What is Ethena
Ethena, the developer of the Ethereum-based stablecoin USDe, wanted to provide a scalable form of crypto-native currency to enable a truly decentralized financial system, while providing a globally accessible dollar-denominated savings vehicle called "internet bonds".
The idea for the product came from an idea by BitMEX founder Arthur Hayes. In March 2023, Arthur wrote the article "Dust on Crust" with the idea of creating a new stablecoin "Satoshi Nakamoto Dollar" that would be backed by an equal number of BTC spot longs and futures shorts. Ethena Labs was inspired by this idea, but opted for ETH instead of BTC as the main asset target, i.e., USDe's collateral is made up of an equal amount of spot ETH long and futures ETH short. In Ethena, there are three main parts, which are USDe, sUSDe, and Internet bonds.
USDe: is an Ethereum-based stablecoin backed by derivatives. Ethena allows users to create USDe using USD, ETH, or liquid staking tokens as collateral.
sUSDe: Rewards earned by staking Liquid chips and funding rates. Initially 1 sUSDe: 1 USDe, over time, 1 sUSDe > 1 USDe
Internet Bonds: Built on top of USDe, combined with yields from Ethereum, as well as funds from the perpetual swap and futures markets, and underlying price differentials, the first on-chain crypto-native "bonds" are created that can be used as a dollar-denominated savings vehicle for users in permitted jurisdictions
Where does Ethena's amazing staking yield come from?
At present, the annualized rate of sUSDe is as high as 35.4%, and many people exchange their USDT, USDC and other stablecoins for USDe issued by this platform. So, where does this amazing staking yield come from?
Ethena also supports staking spot ETH through liquid staking derivative protocols such as Lido, so as to earn an annualized return of 3% to 5%, and then superimpose the yield of ETH short orders (the time when the funding rate is positive is usually much greater than the time when the funding rate is negative, which means that the longs will pay fees to the shorts). So the combination of these two yields creates a considerable high yield on USDe. In this process, the core mechanism of Ethena's products, Delta Neutrality, plays a key role.
Delta: In finance, it is an indicator used to measure the magnitude of the impact of changes in the price of the underlying asset on the change of a portfolio, with values ranging from -1 to 1. Delta neutral means that a portfolio is delta-neutral if it consists of underlying financial products and its value is not affected by small price movements in the underlying asset. For example, if the price of ETH is $1, when creating 1 USDe, 1 ETH will be used as margin to short 1 ETH in derivatives trading. Regardless of whether the price of ETH falls to $0.1 or rises to $100, the value of 1 ETH in the contract can always be maintained at $1 through the hedging mechanism of short contracts, so as to achieve a balance of funds. This creates a natively decentralized and equally collateralized synthetic dollar, ensuring that 1 USDe is always worth $1, reflecting the core value of stablecoins.
Will Ethena be the next Luna?
As Ethena Labs is driving this vision, Arthur himself is directly involved in the minting of a large number of USDe. It also publicly stated on the X platform: "USDe will surpass USDT and become the largest US dollar stablecoin in the market." But will Ethena really become the world's largest dollar stablecoin, and what are the potential risks and crises it faces?
Collateral depegging risk: If Ethena's LST collateral is decoupled from ETH, it will cause ETH shorts to be unable to effectively capture market volatility, which may cause protocol losses. There have been examples of LST depegging in history, such as stETH with a discount of nearly 8% in certain events.
Funding rate risk: While Ethena's backtesting has shown that the number of days of negative returns can be reduced by using ETH as collateral, the funding rate can turn negative, and there have been protocols that have failed due to yield inversions in the past.
Counterparty risk: While the risk of deploying user collateral to a centralized exchange is mitigated through the use of an OES escrow account, the bankruptcy of the exchange can still result in losses. Ethena is required to take steps to reduce the risk of exchange capital, such as settling profits and losses at least daily.
General cryptocurrency risk: Ethena's depositors are exposed to the risk of possible misappropriation of funds by the protocol team, as well as risks associated with potential vulnerabilities in smart contracts. However, Ethena reduces the risk of the latter by using OES escrow accounts without relying on complex smart contract logic.
Trader's strategy mistakes: The risk of loss from a trader's strategy mistake in opening a perpetual contract position on the CEX, as well as the risk of misjudging the demand trend of the stablecoin supply, making money while the stablecoin supply business is stagnant, etc.
Crypto big V Haotian tweeted that Ethena's entry point anchored by the reverse hedging position in the contract market needs to be continuously observed, because the platform is destined to become a "big short" in the market to a greater extent to expand the issuance of stablecoins. In a market trend that continues to be bullish, if the issuance of stablecoins is the main motivation, it is certainly good, but if the platform tends to be more profit-oriented, and wants to scrape oil and water on the already stretched Ethereum DeFi protocol, and at the same time rely on trading strategies to maximize benefits, this will be very challenging in the current less stable trading market.
summary
The crypto market has a native demand for algorithmic stablecoins, and every round of bull market will always rise a boom, but algorithmic stablecoins always lead to a big crash after a period of hot speculation, especially after the Luna thunderstorm, the market has been very frightened about it. Ethena is innovative in terms of design mechanism, but its potential risks are also very large. Ethena may still thrive during a bull market, fueled by money, but Ethena's extremely high yields are essentially difficult to sustain in bear markets, and may still be able to escape the spiral cycle.